Lenders discuss lending costs and effectiveness of recent technology investments
The mortgage industry is in transition as it adjusts to rapidly rising interest rates, inflationary pressures and general slowing domestic and global economic growth. Due to growing affordability constraints for consumers, demand for home buying and mortgage refinancing has declined significantly over the past year, a trend that our Economics and Strategy Research (ESR) group expects to continue until 20231 . Additionally, there has been a significant decline in loan origination profitability in 2022 as average production costs per loan hit a new high.2 In fact, industry data showed a net loss per loan originated in the second quarter of 2022. 2 To help ease mounting stress on their balance sheets, some mortgage companies have announced layoffs or closures of business lines.
To better understand the business pressures of declining loan volumes and rising origination costs, we leveraged our Mortgage Lender Sentiment Survey® (MLSS) to ask more than 200 senior mortgage industry executives what drives changes in loan origination costs, as well as the impact of recent digitization. profitability efforts.
Lenders surveyed cited staff costs as the main factors driving up loan origination costs over the past two years. Additionally, they noted that investing in digitization was less effective at reducing costs – or converting them from fixed to variable – even though, for the most part, it helped improve the consumer experience and reduce the cycle times and error rates.
Using the MLSS, we first asked lenders to look back over the past two years and select the two main areas that led at the top the average cost per loan and the two main areas that led down the average cost per loan. Lenders reported that personnel costs, including enforcement, compliance/legal, and loan officers, were the top factors driving up average loan costs. Investments in digitization, including back-end processing and consumer-facing technology, were the main areas that drove down average costs. Going forward, lenders expect costs associated with consumer-facing technology and compliance/legal to grow the most, followed by marketing costs and back-end process technologies.
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While a large majority of lenders said they had invested in digitization efforts over the past two years, the cost savings benefits were not universally reported. Only 7% of lenders reported “significant” cost savings resulting from digitization efforts, and 52% reported “certain” savings. Large lenders were more likely to report cost savings than medium or smaller lenders, likely due to their greater economic scale. Additionally, mortgage banks and credit unions were much more likely than deposit-taking institutions to say they had invested in digitization for “non-monetary benefits”, such as indicating that such investments can be “table stakes “.
Additionally, lenders who have invested in digitization have found their digitization efforts effective at improving customer experience, reducing cycle time/increasing productivity, and improving work quality, but less effective at reducing costs or converting fixed costs into variable costs.
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We also asked lenders about outsourcing to help manage costs. The survey results suggest outsourcing is not a common practice in the mortgage industry, with nearly 80% of lenders saying they manage their loan origination process in-house. Additionally, most lenders surveyed said they plan to keep the process in-house. However, of the few lenders that outsource at least part of the loan origination process, 80% found outsourcing effective in converting fixed costs into variable costs.
Although lenders have invested heavily in digitization over the past few years, lenders said they find these investments less effective in managing costs. In our view, this is likely due to the fact that many loan origination costs are fixed. For example, regardless of demand, lenders are paying for legislation/compliance and technology, the main cost areas that surveyed lenders believe will increase the most. Many lenders also pointed out that they had invested in technology to meet changing consumer preferences, and that a positive return on such investment was not necessarily the primary objective.
Given that lenders recognize that technology and legal/compliance costs are unlikely to be reduced, many appear to be turning to reducing payroll to help manage costs. Employment among non-banks and mortgage brokers remains relatively high today, compared to the pre-COVID era. While the market is seeing significant declines in loan volume and applications, productivity (in terms of average loan volume or applications per employee) has also fallen significantly, indicating that there is potentially excess capacity. . Recent news on layoffs, mortgage business closures and mergers suggests that lenders are cutting production employment in response to the cooling housing market. With an industry consensus forecast of a 35% to 50% decline in origination volume in 2022, it is likely that many lenders will continue to adjust their capacity to stay competitive.
To learn more, read the research brief or access our infographic.
The author thanks Dan Miller, Tomas Ducaud, Steve Deggendorf, Matt Classick, Ricky Goyette, and Li-Ning Huang for their valuable contributions to the creation of this commentary and the design of the research. All errors remain the responsibility of the author.
1 Please see the Economic and Strategic Research (ESR) Group webpage for updated economic and real estate forecasts, https://www.fanniemae.com/research-and-insights/forecast.
For example, the National Association of REALTORS® Pending Home Sales Index, which tracks existing home contract signings and typically leads one-to-two-month closings, fell 1% to 89. 8 in July 2022, the eighth drop in the previous nine months. Year-over-year, pending transactions fell 19.9%. https://www.nar.realtor/newsroom/pending-home-sales-slipped-1-0-in-july.
Sales of new single-family homes fell 12.6% month-over-month to a seasonally-adjusted annualized rate of 511,000 in July 2022, the lowest figure since January 2016, according to the Office of the census. https://www.census.gov/construction/nrs/pdf/newressales.pdf
2 According to the Mortgage Bankers Association August 2022 report Mortgage Bankers Quarterly Performance Reportindependent mortgage banks (IMBs) and chartered bank mortgage subsidiaries reported a net loss of $82 on every loan they originated in the second quarter of 2022, down from a reported gain of $223 per loan in the first quarter of 2022, and a gain of $1,099 per loan in the fourth quarter of 2021, reaching its lowest level since the fourth quarter of 2018. The only other quarters in the history of the survey to have losses net production were the first quarters of 2014 and 2018, and the fourth quarter of 2018.
Total loan production expenses – commissions, compensation, occupancy, equipment and other production expenses and corporate allowances – increased to a high of $10,937 per loan in the second quarter of 2022. From the third quarter of 2008 to first quarter of 2022, loan production expenses averaged $6,902 per loan. Personnel expenses averaged $7,371 per loan in the second quarter, up from $7,113 per loan in the first quarter.